Q: How do I know when to sell a particular investment? I would like to reduce my risk in case of a major market downturn.
A: This is a very good question that many investors, individual and professional, struggle with. I believe that the first step is to have a well-diversified portfolio.
When I speak of diversification, I mean having your investments in a wide variety of asset classes that have low correlations to each other. Diversification and asset allocation do not guarantee against market loss or ensure market gains. They are techniques to help manage investment risk. Unfortunately, during the economic downturn of the past couple of years we saw high correlations with many asset classes all moving down together.
Once you have a well-diversified portfolio, it can be prudent to have a “sell” strategy for your different asset classes.
There are many strategies and theories on how to implement sell decisions. You may want to take a macro (big picture) view when determining buy and sell decisions.